Monthly Archives: July 2012

Why File a Chapter 13 Bankruptcy Case?

By

There are many reasons why filing a chapter 13 bankruptcy case may be the best course of action.  Lately the most common reason is because of the mortgage crisis.  Too many homeowners are still struggling with their mortgage payments.  Filing a chapter 13 bankruptcy case will allow a homeowner to catch up on missed mortgage payments by spreading the missed mortgage payments out over the life of the plan of reorganization.  Most plans last sixty months.  Another result of the mortgage crisis was the steep decrease in home values.  The flip side of this unfortunate circumstance is that underwater second mortgages or equity lines of credit can be removed when filing a chapter 13 bankruptcy under the right circumstances.  Make sure you retain a bankruptcy attorney that is familiar with filing a motion to avoid the underwater liens.

Unpaid taxes are another reason to choose to reorganize your debts is to discharge taxes and pay the portion of the taxes that are not dischargeable in the plan.  Whether taxes are dischargeable or not depends upon time.  How much time has passed since the taxes were due, when they were assessed and whether or not you filed the tax return on time.  There are a number factors in determining whether taxes are dischargeable or not that this article does not mention.  Taxes can also be discharged when filing a chapter 7 bankruptcy case too.

Another reason to reorganize your debts is to reduce your car payment.  Chapter 13 can cramdown the amount to pay for the vehicle to its fair market value.  Not the amount you owe at the time the case is filed.  The plan of reorganization can also reduce the percentage rate.  Your vehicle must be purchased at least 910 days prior to the bankruptcy case being filed.  Many car loan companies will object to approval of the plan and try and argues the vehicle is worth more than the vehicle actually is.  If you cramdown a vehicle loan to the fair market value expect to hear from the car loan company.

In 2005 the bankruptcy code was amended to create what is called the Means Test.  The Means Test was designed to determine if you have disposable income available to unsecured creditors.  It is far from perfect and uses local standards for some expenses and national standards for other expenses.  This is an attempt to create a cookie cutter approach to push high income bankruptcy filers into repaying some of their debt in the plan of reorganization.  The Means Test has made filing bankruptcy more complicated and retaining an experienced bankruptcy lawyer that is very familiar with what is allowed in your jurisdiction and not allowed by the chapter 13 trustee’s office is very important.  All chapter 13 trustee’s administer chapter 13 bankruptcy cases differently.

There are many other reasons to file a chapter 13 bankruptcy that are not mentioned in this article.  It all depends upon your income, expenses and assets.

Did the City of San Bernardino, California File Bankruptcy Under Chapter 9?

By

As of today, Friday, July 27, 2012, the City of San Bernardino has not filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code.  The San Bernardino City Council is still complying with AB 506 and Government Code Section 53760.  California recently passed this law, AB 506, or Government Code Section 53760, which provides two possible ways a municipality in California can file bankruptcy.  One path is the neutral evaluation process (NEP).  The other path is declaring a fiscal emergency and adopting a resolution by a majority vote of the governing board pursuant to Government Code Section 53760.5.  San Bernardino recently voted to declare a fiscal emergency.

It is noteworthy that they chose not to try the NEP pursuant to Government Code Section 53760.  The NEP is started by the request of the public entity and giving notice by certified mail to all interested parties.  Stockton, California tried to negotiate with its creditors prior to filing bankruptcy to no avail.  The NEP can only last 60 days from the date an evaluator is selected unless the parties agree otherwise.  Stockton and its creditors chose to extend the NEP for an additional 30 days to try and work things out.  The problem is that you must negotiate a better deal with large number of those you owe money to or even all of them to avoid filing bankruptcy.  Our clients who file consumer bankruptcy cases no this all too well.  If you settle with just one of your creditors you have most likely just wasted time and valuable money.

A public entity may also file for bankruptcy protection under Chapter 9 in California if the public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board at public hearing.  At the public hearing, a finding that the financial state of the local public entity jeopardizes the health, safety or well-being of the residents of the public entity. See California Government Code Section 53760.5.  This is what San Bernardino has chosen to do.  Now that San Bernardino has declared a fiscal emergency their bankruptcy attorneys will most likely file their case shortly.  If will be interesting how San Bernardino’s bankruptcy lawyers prove it is eligible to be a debtor under Chapter 9 of the Bankruptcy Code given it declared a fiscal emergency.  Stockton by contract chose the NEP and also must prove it is eligible to be a debtor under Chapter 9 of the Bankruptcy Code.  Will their arguments be substantially the same even though they chose different paths in complying with California law prior to filing their bankruptcy cases?  Stockton will be up first, and then eventually San Bernardino will go through the same process once it files its Chapter 9 bankruptcy petition.

Retired Employees of Stockton Sue the City of Stockton in their Chapter 9 Bankruptcy

By

On July 10, 2012, the Association of Retired Employees of the City of Stockton filed an adversary complaint suing the City of Stockton in their Chapter 9 bankruptcy case for impairment of contract under the United States Constitution, impairment of contract under the California Constitution, denial of due process, breach of contract, promissory estoppel and declaratory relief.

The retired employees of Stockton hired bankruptcy attorneys to sue Stockton because they believe most of them were promised as part of their compensation package the payment of health insurance premiums during retirement.  As part of bankruptcy Stockton plans to stop payment of health insurance premiums for many of the retired employees.  There are approximately 500 retired employees.  The retired employees are requesting a temporary restraining order to stop Stockton from eliminating payments for their health insurance premiums.  The lawsuit alleges that if the payment of the health insurance premiums is stopped it could endanger the lives of the elderly and ill retirees.

According to court records Stockton started paying the entire health insurance premium for police officers around 1980, then to more of their retired employees as the 1980’s continued, and by 1991 Stockton paid for all retired employees, plus one dependent or spouse’s, health insurance premiums until age 65.  The lawsuit alleges that many of Stockton’s unions made wage concessions to maintain the benefits.  It would appear that these city employees still received pay increases as high as 4% per year or between 2.5% and not to exceed 6% per year.  I know many employees at private companies would be more than happy with a wage increase of 4% per year each year in the real world.  Most private employers make employees pay for all or most of health insurance premiums these days too.  Most employees of private employers rarely see pay increases each year at a set percentage too.

All that aside, when Stockton consulted bankruptcy lawyers and filed bankruptcy they announced they would stop making health insurance premium payments for all retirees who had been employed with the city for less than ten years and provide a lesser stipend to the long term retirees.  They also announced that all health insurance premiums would no longer be paid in their entirety as of July 1, 2013.

This situation is really unfortunate no matter what the outcome is.  The Bankruptcy Court will ultimately make a choice that truly could greatly affect the health and welfare of the retired employees of Stockton.  At the same time it will set a precedent for future municipal bankruptcy cases regarding the treatment of deferred compensation and retirement benefits.  Stockton needs to become financially viable again by cutting costs.  Retired employees and other creditors were unwilling to make deep enough cuts outside of bankruptcy, so now they find themselves at the expensive process of dealing with it in bankruptcy court.

How Can Credit Card Companies Charge High Interest Rates?

By

You may never have heard about state usury laws.  Each state in the United States has usury laws limiting the amount in interest that can be charged in various financial transactions.  Every state can control by law the amount of interest that can be charged when money or credit is extended.  The California Code and a number of subsections govern the interest rates that can be charged in California.  Personal loans and consumer loans in California have a usury interest rate attached to these loans of 10%.  The interest rate established for non-consumer loans is 5% greater than the interest rate duly established by the Federal Reserve Bank of San Francisco.

So How Can Credit Card Companies Charge Such High Interest Rates?

Again, so how can credit card companies charge such high interest rates?  The answer is the need for jobs, the Supremacy Clause, capitalism, and Marquette National Bank v. First of Omaha Corporation, 439 U.S. 299 (1978).  This is a 1978 Supreme Court of the United States (SCOTUS) case that led to the change in how much you pay for interest on credit card debt.  SCOTUS more or less ruled that First Omaha Corporation could charge citizens of other states the allowed interest rates for the state where First Omaha was located in, not the state interest rate where the customer resides.  12 U.S.C. 85 authorizes a national banking association “to charge on any loan” interest at the rate allowed by the laws of the State “where the bank is located. Not where the customer is located.  This means that First Omaha Corporation, located in the state of Nebraska, could charge customers in other states the higher interest rate Nebraska state law allowed, and not be limited to the interest rate in the state the customers lived.  This probably created millions of bankruptcy cases for bankruptcy attorneys to file since 1978.  How many less bankruptcy cases would there be if interest rates were capped at 10%?

Okay, so how did this lead to 29% interest rates when most state usury laws protect us from such high interest rates?  Well, this is where the need for jobs and capitalism took over.  Guess what happened next?  Certain states really needed jobs for their residents.  The state legislatures of these certain states basically did away with their state usury laws to entice banks that issue loans and credit cards to set up shop there and give their residents jobs.  It worked really well.  South Dakota is home to thousands of jobs as of a result because banks flocked there to set up shop and charge higher interest rates to customers in other states now that South Dakota had favorable usury laws.  South Dakota is not the only state that did this.  A few other states repealed their state usury laws limiting interest rates to attract banks too.  To be blunt about it a few thousands jobs were created resulting in millions of citizens of the United States legally being charged interest rates of 20% or more on their credit cards.  Was it worth creating millions in indebtedness for the many for a few states to generate a mere few thousand jobs for their residents?  No, usury laws exist for a reason and usury laws exist to protect the poor and vulnerable from lenders with unfair bargaining power.

Fun With Numbers

Do you really know what 28% interest on a revolving credit account looks like or how the interest accrues?  We shall no play with some numbers to get a better idea. 

Example No. 1:  The credit card has a credit limit of $10,000 and the interest rate is only 7%.  The balance is $7,500 and more or less the minimum payment is made each month and seek to payoff the total in 36 months or three years.  $7,500 paid over 36 months at 7% interest creates $835 in total interest paid (11% of total borrowed).  $7,500 paid over 36 months at 14% interest creates $1,731 in total interest paid (23% of total borrowed).  $7,500 paid over 36 months at 28% interest creates $3,673 in total interest paid (49% of  total borrowed).  The difference between 7% and 28% over the long-term is nigh and day.  People spend hours and hours shopping to find the best deal then make the purchase with their 28% interest credit card thinking they got a good deal.  If you payoff the balance each month yes.  If you carry a balance for years you are paying 23% – 49% more for your purchases that you bought on sale.  

The fake news is that most bankruptcy cases are caused by medical debts or other circumstances outside of a persons control.  That is not true.  While there are plenty of bankruptcy filings due to uncontrollable horrible circumstances the majority are due to credit card debt and consumer spending.  Credit card debts and the high  interest rates are the most common reason our bankruptcy clients speak of when explaining their reasons for choosing to file for bankruptcy protection.  

The First Fight: Stockton California Bankruptcy Case 12-32118

By

On June 29, 2012, the City of Stockton filed a motion to disclose information about the failed neutral evaluation process (NEV).  The NEV was required to take place under California Law, California Government Code 53760.  The NEV process began on March 27, 2012, and ended approximately 90 days later after an extension of time to try and continue negotiations to avoid bankruptcy.  The NEV process concluded on June 25, 2012.  Code section 53760 allows for disclosure of NEV information under certain circumstances.  If it is determined that the confidential information disclosed during the NEV process is necessary to prove a municipality is eligible to be a debtor under Chapter 9 of the Bankruptcy Code.  This is the reason the City of Stockton sought permission from the Bankruptcy Court to release confidential information.  Stockton wanted to provide the Bankruptcy Court with a 790 page document that details their financial circumstances, the length of the negotiations and the participants.  Stockton needs to prove it filed its bankruptcy petition in good faith pursuant to Bankruptcy Code section 921(c).

A number of parties that participated in the NEV process opposed Stockton’s request including Wells Fargo National Association.  Their limited objection argued that Stockton’s request only sought permission for Stockton to release information about the NEV process and did not ask for permission for all parties that participated in the NEV process to disclose their information.  If only Stockton could disclose this information then it would look one sided.  The concern was that Stockton would merely pick and choose the information to disclose and not show the whole picture of the failed negotiations.

A hearing was held regarding Stockton’s request on July 6, 2012.  The Bankruptcy Court chose to deny Stockton’s request and a memorandum of decision on July 13, 2012.  The Court implemented a protective order on the confidential information and take an incremental approach to approach to allowing any of the NEV information to be disclosed.  The Court reasoned that there is no evidence that Stockton needs to disclose confidential information to prove its eligibility to be a debtor under Chapter 9 yet.

Unlike a consumer or business filing for bankruptcy protection under Chapter 7 or Chapter 13, an order for relief is not immediately entered when a municipality files for protection under Chapter 9.  A municipality must prove it is eligible for relief and that the petition was filed in good faith.  This will be the next major fight in Stockton’s bid to seek relief under the Bankruptcy Code.

Why Did Stockton California File For Bankruptcy Under Chapter 9

By

On June 28, 2012, the City of Stockton, California, filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code, Bankruptcy Case Number 12-32118, in the Bankruptcy Court for the Eastern District of California.  After complying with California Government Code Section 53760 they were unable to negotiate with creditors and avoid filing bankruptcy.  So what happened here?  Why did Stockton California file bankruptcy?

In court documents the city refers to the collapse of the housing market and calls the mortgage crisis the Great Recession.  Like many individuals that choose to file bankruptcy Stockton tried to work things out.  The city renegotiated labor agreements, depleted reserves, imposed compensation reductions, reduced and eliminated services, missed bond payments and even deferred payments to retiring employees in an attempt to avoid bankruptcy.  Sounds like what an individual does to avoid bankruptcy too.  Many of our clients have sold jewelry, depleted their retirement accounts, cut back on bills such as cable or internet, missed payments on credit cards and anything else to avoid filing bankruptcy.  Unfortunately bankruptcy does become the best financial decision at some point.

Stockton’s retirement costs are out of control and have been for some time.  Stockton’s largest creditor by far is the California Public Employees Retirement System.  They owe PERS an estimated $147 million in unfunded retirement benefits.  The next largest creditor is Wells Fargo Bank.  The city owes Wells Fargo Bank approximately $126 million for pension obligation bonds.  What are pension obligations bonds?  Pension obligation bonds are basically a way to fund retirement benefits when a city does not actually have the money to pay for the benefits.  The bonds pass on the cost to future generations in the hope that the public entity will be able to continue to make the monthly payment for the bonds and continue to operate normally.  If a city does not set aside enough money during an employee’s career so that the employees lifetime retirement benefits are paid in full by the time the employee retires the city has to find the money somewhere.  It is more or less a Ponzi scheme at the tax payers’ expense.

Pension obligation bonds usually have low percentage rates.  The rate could be as low as 4 percent or as high as 7 percent.  Some government entities have even used these borrowed funds to invest and obtain a higher rate of return, say 8 percent, and in theory make money and be able to fund their retirement costs in the future.  It is basically gambling with borrowed money.  This is a recipe for disaster when property taxes and general funds do not continue to grow.  Many other municipalities across the United States are and will face the same problems Stockton is facing.